Tuesday, 21 February 2012

Mutual Fund is a trust that pools the savings of a number of
investors who share a common financial goal. Each scheme of a mutual fund can
have different character and objectives. Mutual funds issue units to the
investors, which represent an equitable right in the assets of the mutual fund.

What is the
difference between an open ended and close ended scheme?

Open ended funds can issue and redeem units any time during
the life of the scheme while close ended funds can not issue new units except
in case of bonus or rights issue. Hence, unit capital of open ended funds can
fluctuate on daily basis while that is not the case for close ended schemes.
Other way of explaining the difference is that new investors can join the
scheme by directly applying to the mutual fund at applicable net asset value
related prices in case of open ended schemes while that is not the case in case
of close ended schemes. New investors can buy the units from secondary market
only.

How are
mutual funds different from portfolio management schemes?

In case of mutual funds, the investments of different
investors are pooled to form a common investible corpus and gain/loss to all
investors during a given period are same for all investors while in case of
portfolio management scheme, the investments of a particular investor remains
identifiable to him. Here the gain or loss of all the investors will be
different from each other.

What does
Net Asset Value (NAV) of a scheme signify and what is the basis of its
calculation?

Net asset value on a
particular date reflects the realisable value that the investor will get for
each unit that he his holding if the scheme is liquidated on that date. It is
calculated by deducting all liabilities (except unit capital) of the fund from
the realisable value of all assets and dividing by number of units outstanding.

Can I get fixed monthly income by investing in mutual fund units?

Yes, there are a
number of mutual fund schemes which give you fixed monthly income. Further, you
can also get monthly income by making a single investment in an open ended
scheme and redeeming fix value of units at regular intervals.

What are
the tax benefits for investing in mutual fund units?

Dividend income from
mutual fund units will be exempt from income tax with effect from July 1, 1999.
Further, investors can get rebate from tax under section 88 of Income Tax Act,
1961 by investing in Equity Linked Saving Schemes of mutual funds. Further benefits
are also available under section 54EA and 54EB with regard to relief from long
term capital gains tax in certain specified schemes.

As my dividend
receipts from mutual fund units were tax free under section 80 L, will I loose because of the new budget provision
whereby my mutual fund will pay 10% tax on total dividend distributed and
indirectly even I will end up paying the tax?

The above statement
is partially true. 10% tax on dividend paid is not applicable for funds which
have invested more than 50% in equity for next three years. Hence, if you have
invested in an equity scheme, you will not loose out for the time being.
However, in case of debt funds, your statement is true.

Are
investments in mutual fund units safe?

No stock market
related investments can be termed safe with certainty as they are inherently
risky. However, different funds have different risk profile which is stated in
its objective. Funds which categorize themselves as low risk, invest generally
in debt which is less risky than equity. Anyway, as mutual funds have access to
services of expert fund managers, they are always safer than direct investment
in the stock markets.

How do I find out about a scheme which suits my individual requirements?

You have to define
your individual requirements and then simply go to ‘Choose a Scheme’ icon on the home page of this web site. You
can select your defined parameters and get a list of schemes which would fit
the needs.

As mutual
fund schemes invest in stock markets only, are they suitable for a small
investor like me?

Mutual funds are
meant only for a small investor like you. The prime reason is that successful
investments in stock markets require careful analysis of scrips which is not
possible for a small investor. Mutual funds are usually fully equipped to carry
out thorough analysis and can provide superior returns.